RioTinto: Analysis of Corporate Financial Information

1. Analysis of Corporate Financial Information 02/12/15
GROUP 18Xue Chen / Yuqi Tang / Panas Panagiotis / Yungho Chen
( )

2.  Founded 1873
 Global multiple resources
company
 World no.3 aluminum
company
 World no.2 iron ore
company
Coal,
4308
Iron ore,
23281
Diamonds
, 4150
Copper,
6282
Aluminiu
m, 12123
INTRODUCTION
Like many major mining companies, the Rio Tinto Group has
historically grown through a series of mergers and demergers

3. Analysis of Corporate Financial Information 02/12/15
Valuation
Growth
Opportunity
Cash FlowProfitability
SELL

4. Analysis of Corporate Financial Information 02/12/15
Profitability
Panas
Panagiotis

5.  Common strategy: portfolio diversification
 Differentiation with its competitors
 Low cost production
 Capture demand from smaller players in the market
 Difficult to compete lower prices
 Is the strategy successful in terms of
profitability?
STRATEGY

6. -30
-20
-10
0
10
20
30
40
2011 2012 2013 2014
Turnover Ratio
RioTinto BHP Vale Anglo Anerican
Key features:
 Volatility
 Not consistent
growth rate
CHANGE IN TURNOVER

7. 0
20,000
40,000
60,000
80,000
2010 2011 2012 2013 2014
US$M
Revenues & EBITDA
Revenues EBITDA
Key features:
 Large drop in 2012
 Decline in Revenues
 Increase in EBITDA
PROFITABILITY REVENUE & EBITDA
 Strategy seems successful

8. 0
5,000
10,000
15,000
20,000
25,000
Al Co D&M Energy Ore
US$M
Revenues
2013 2014
0
4,000
8,000
12,000
16,000
Al Co D&M Energy Ore
US$M
EBITDA
2013 2014
 Aluminium, Copper, Diamonds & Minerals
 Energy, Iron
PROFITABILITY BY SEGMENTS

9.  Iron ore: main component (54%)
 The Chinese Economy is slowing down
 Decrease in demand
 Drop in Commodities prices (volatility)
MAIN PROBLEMS

10. -15
-10
-5
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
ROA
Rio Tinto BHP Vale Anglo American
-30
-20
-10
0
10
20
30
40
50
2011 2012 2013 2014 2015
ROE
Rio Tinto BHP Vale Anglo American
 Rio Tinto performs better than its main competitors
PROFITABILITY COMPARISON

11. Analysis of Corporate Financial Information 02/12/15
Cash Flow
Yuqi
Tang

12. 2012 2013 2014
Rio Tinto BHP Billiton Vale Anglo American
US$ billion
LargeAmount
-8,185
2,077
6,124
High volatility
STRATEGY: CAPEX⬇️, Cash Returns to shareholders⬆️, Strong Balance Sheet
FREE CASH FLOW

13. 2012 2013 2014
Rio Tinto BHP Billiton Vale Anglo American
Net OCF
US$ billion
14,286
3,905
9,430
25,364
12,807
2012 2013 2014
Rio Tinto BHP Billiton Vale Anglo American
CAPEX
US$ billion
8,162
3,918
17,615
15,704
11,813
FREE CASH FLOW SOURCES

14. 2011 2012 2013 2014
Dividends declared
US cents per share
145
167
192
215
Payout Ratio 2011 2012 2013 2014
Rio Tinto 0.39 0.00 0.89 0.58
BHP Billiton 0.21 0.38 0.54 0.46
Vale 0.01 0.29 1.19 1.06
>98%
Sustainableshareholderreturns
2010 2011 2012 2013 2014
EPS
DPS
 Stable dividend policy
 Struggle to seize shareholder
15%
15%
12%
FREE CASH FLOW DIVIDEND

15.  Strong solvency now but still a threat in the future
 Giving up the potential financing opportunity
FREE CASH FLOW LOAN REPAYMENT
2011 2012 2013 2014 2015
ROA 5.02% -2.54% 3.19% 5.96%
?ICF -0.73% -0.41% -0.78% -1.05%
Spread 4.29% -2.95% 2.41% 4.91%

16.  Project
IRR>15%
 Less
opportunity
 Increase EPS
 Stable the Stock Price ?
SELL
FREE CASH FLOW BUY-BACK

17. Analysis of Corporate Financial Information 02/12/15
Growth
Opportunity
Yungho
Chen

18. 0%
10%
20%
30%
40%
50%
60%
Rio Tinto BHP Vale
Iron ore
Aluminium
Diamond
Iron ore
Iron ore
Petroleum
Coal Fertilizer
nutrients
Copper
 Diversification in products
STRATEGY

19. 2015
first
half
2014
first
half
Revenue 7,573 12,596
Net earnings 2,099 4,683
Profit ratio 28% 37%
Total production
(Million tonnes)
123.3 109.9
Steel production
Developing countries
China
Who needs iron ore?
IRON ORE
7%
DEMAND

20.  Supply will go
down to meet
demand?
 NO!
IRON ORE SUPPLY
2005
2009

21. Fierce supply competition
Maximize production
Cost advantage in the industry
“The big three---Rio, BHP and Vale, are killing a decade-long
commodities by oversupplying the market”
“Our analysis indicates
there are 32
competitive projects
that could be
incentivized if we were
to withhold volume”
IRON ORE

22. 2015 first half 2014 first half
Revenue 5,455 5,752
Net earnings 793 373
Profit ratio 14.5% 6.5%
Total production
(Thousand tonnes)
21,179 20,188
ALUMINIUM

23. 0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
0
20000
40000
60000
2011 2012 2013 2014
Total Consumption
Total Production
Rio Tinto Production
ALUMINIUM
10.00%
12.00%
14.00%
16.00%
18.00%
2011 2012 2013 2014
UC Rusal
Chalco
Rio Tinto
Hongqiao
10.00%
12.00%
14.00%
16.00%
18.00%
2011 2012 2013 2014
UC Rusal
Chalco
Rio Tinto
Hongqiao
Alcoa
 Why?
 65% Value-added
products

24. Analysis of Corporate Financial Information 02/12/15
Valuation
Xue
Chen

25. Source: Morningstar Financials
Period end:
31/12/2014
Market Cap
(USD, Millions)
Enterprise Value
(USD, Millions)
Rio Tinto 85,724 106,672
Ratios Rio Tinto BHP Vale
Anglo
American
MEAN
Adjusted
Value
Difference
Price/Earnings 13.9 9.1 NEG NEG 11.5 70922.7 -14801.3
Price/Book 1.8 1.6 1.1 0.8 1.3 63102.4 -22621.6
EV/EBITDA 8.8 6.2 NEG NEG 7.5 73428.7 -12295.3
EV/Sales 2.1 2.5 2.1 1.2 2.0 79355.4 -6368.6
Market Cap 85724
VALUATION RATIO ANALYSIS

26. -4
-2
0
2
4
6
8
2010 2011 2012 2013 2014
Dividend per share Earning per share
VALUATION
-6
-4
-2
0
2
4
6
8
10
2010 2011 2012 2013 2014
Free Cash Flow per share
 Negative free cash flow
 Not suitable for DCF model
 EPS negative & Dividend keeps increasing
 Satisfy shareholders
 Dividend payout ratio too high
 Dividend may not be sustainable
 Not suitable for DDM model
Source: Morningstar Financials

27. Source:www.gurufocus.com
VALUATION Residual Earnings Model
Year Equity Equity
Charge
Net
Income
Residual
Income
RI per
share
Discounted
RI
2010 58333 4707.47 14238 9530.53 4.83 4.33
2011 52199 4212.46 5835 1622.54 0.84 0.67
2012 46553 3756.83 -3028 -6784.83 -3.67 -2.65
2013 45886 3703.00 3665 -38.00 -0.02 -0.01
2014 46285 3735.20 6527 2791.80 1.50 0.87
SUM of Discounted RI 3.22
Cost of Equity=8.07% WACC=11.46% BV=20.52
P=20.52+3.22=23.74 < Share Price 33.40
Difference:higher expectation for the company

28. Source:www.gurufocus.com
VALUATION
Price Calculated Share Price percentage
RIO TINTO 23.74 33.40 71.07%
BHP 24.17 27.31 88.49%
Vale 11.97 3.36 356.30%
Anglo American 102.07 197.32 51.73%
Mean of percentage (exclude Vale) 70.43%
 Vale: book value per share dropped significantly
 Whole industry: overvalued
 Rio Tinto: perform normally among the industry

29. Doubts on future profitability because of
Chinese economy
Lack investment opportunities
Poor use of money
Large impairment charges
Fail to capture incremental aluminium
demand in the market
Overvalued on share price
Sell
CONCLUSION

30. THANK YOU